Thomas L. Snyder, DMD, MBA Managing Partner The Snyder Group, LLC Printer Friendly Version

Should You Employ An Associate As A Sole Proprietor?
by Thomas L. Snyder, DMD, MBA, Managing Partner

When you are ready to hire your first associate and if you have been a sole proprietor your entire career, you need to consider changing your business structure. The reason is quite simple in that you need to protect yourself in the event of a malpractice action on behalf of your associate. We also recommend that the host doctor require the associate to maintain the same malpractice insurance carrier as well. You actually have two choices to consider in choosing a new business and here are the choices:

1. LLC/LLP
A Limited Liability Company or Limited Liability Partnership is the business entity that we typically recommend for sole proprietors who have hired their first associate. The LLC or LLP is also called a PLLC or PLLP in several states. The LLC is not a separate taxpaying entity as is the case with a Professional Corporation (PC). If you are a sole proprietor it will not change the way you file your tax returns. You will continue to file a Schedule C with your Form 1040. The protection that you receive from a LLC is invaluable. For example, if an employee were to run an errand and become injured, there is liability if you are a sole proprietor. So the single entity LLC makes a lot of sense for more than the reason of just hiring an associate. The single member LLC affords you the same protection provided by a Professional Corporation, yet is less expensive since you only file one tax return.

In the event that your associate eventually becomes your partner and if you wish to retain the LLC format, you will need to form a new LLC to include multiple members. The multiple members LLC usually files a Form 1065 with income flowing through to each member. The legal protection provided is, of course, the same.

One of the major benefits of adopting a LLC format is that you continue to pay your self-employment taxes on a quarterly basis. If you have been doing this for your entire career, the LLC is a very attractive alternative from a cash-management point of view. Unlike Professional Corporations whereby you pay taxes when you receive your salary, this can be a big advantage for cash-management purposes.

Another feature of a LLC is that you do not have to return a Corporate Minute Book as in a Professional Corporation. Speak to a dentist who is audited and does not have an updated Corporate Minute Book for the IRS agent to review!

2. Professional Corporation
Another option in lieu of the single member LLC is to form a Professional Corporation when you hire your associate. There are two forms of corporations for you to consider; “C Corp” or “S Corp.” The original Professional Services Corporations were structured as a “C Corp.” In a “C Corp” you are not required to have a calendar year-end, but can select any month and day of the year as your fiscal year-end. One of the big disadvantages of the “C” format of Professional Corporations is facing the issue of double taxation when engaging in a buy-in or sale. You must consider personal goodwill and corporate goodwill as well as personal restrictive covenant and corporation restrictive covenant. For the most part, “C Corps” are not commonly used in today’s world.

“S” Corporation, of course, is the most popular form of Professional Corporation used today. In this case, unlike a single member LLC, you are establishing a taxable business entity and will be filing a Form 1120S tax return. The PC provides you benefits such as shielding you from any personal liability with only the limitation of the assets contained within the corporation. A big difference with the “S” Corporation is the requirement to pay yourself a salary. So, cash-flow management can be a key reason why you may not wish to form an “S Corp,” particularly if you have high overhead and cash-flow is typically tight. In an “S Corp” any profits have been taxed at ordinary income rates. However, as of January 1, 2011 that status will change as Congress has closed a big loop hole now requiring that all income from an “S Corp,” whether it is salary or profit, be subject to FICA and Medicare tax.

The most important thing to consider when hiring your first associate is to structure a business entity that will protect your personal assets from any actions of the new associate.

Dr. Thomas L. Snyder, Director, Practice Transitions for The Snyder Group, a division of Henry Schein Professional Practice Transitions.  With over 75 years of experience in the field, The Snyder Group can provide you a full range of services relating to practice transition matters.  They can also be reached directly at 1-800-988-5674.

If you would like additional help, email Dr. Snyder at drsnyder@thedentistsnetwork.net.

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